Although few people outside finance circles know who Charles Ponzi was, most can guess what he’s famous for, given his last name.
The term “Ponzi scheme” or “pyramid scheme” is familiar as an investing scam in which money from a constant stream of new investors is used to pay off earlier investors while simultaneously enriching the scheme’s creator.
The scheme or scam continues until, as is always the case, it collapses when there are no more new investors.
Although Ponzi was not the first to utilize this scam to make money, he’s the most famous and therefore the one for whom it is named.
Early Life and Education
Charles Ponzi was born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi on March 3, 1882, in the town of Lugo in northern Italy. His parents, Oreste and Imelda Ponzi, Ponzi later said, were part of a wealthy Italian family that had become borderline poor by the time he was born. Ponzi is said to have expressed criminal tendencies early on, stealing from his parents and even parish priests.
As a young man, he attended Sapienza University in Rome, where, by his own account, he was less than a model student.
As a result, after four years, Ponzi was forced to leave with no money and no degree.
During his university years, he had heard stories of other Italians who went off to America to find fame and fortune and decided that this was the only course left open for him.
Coming to America
Ponzi arrived in Boston in November 1903 aboard the S.S. Vancouver. In his autobiography, The Rise of Mr. Ponzi, he claimed that he left Italy with $200 but arrived in America with far less.
“The $200 had dwindled down to $2.50 on the way over and a card sharp had taken me for most of it and the tips and the bar the rest of it,” wrote Ponzi. Over the next few years, Ponzi managed to learn English and perform odd jobs.
In The Rise of Mr. Ponzi, the self-styled jack-of-all-trades explained it like this: “I tried my hand at everything. From grocery clerk to road drummer.
From sewing machine repair man to insurance salesman. From factory hand to kitchen and dining room help. In some of the jobs I lasted no time. In others, I lasted longer.
Often, I would be fired. Oftener, I would quit of my own accord either disgusted or to avoid being fired.”
In his personal account, Ponzi fails to mention the reason for some of those firings including theft and shortchanging customers.
After moving to several cities, including Pittsburgh, New York, New Haven, Conn., and Providence, R.I., he ended up in Montreal, Canada, where he worked as a bank teller.
He lost that job when the bank went under. As was often the case with Ponzi, he turned back to crime, which resulted in a three-year stretch in prison in Quebec for forgery.
After release, he began helping smuggle Italian immigrants into the United States.
This was followed by two more years in prison in Atlanta after getting caught at that endeavor.
An American Beauty
Back in Boston on Memorial Day weekend 1917, Ponzi, now 35 years old, noticed a young girl on a streetcar platform. “One glance at her,” he later wrote, “at that picture of loveliness and kindness and clean vivacity! One look into her deep, dark, smiling eyes! At that pretty, round face, framed in a background of gorgeous curls!…I was no longer able to remove my eyes from her.”
Her name was Rose Gnecco, and in February 1918, they were married. For the next few months, Ponzi worked at several jobs including his father-in-law’s grocery store, an import-export company, and his wife’s family’s fruit company, which failed shortly after.
Rose was by Charles’s side through the tough times and during the dizzying ride to riches, including a 12-room mansion, servants, and a custom-built limousine.
She stayed with him when the scheme failed and even when he went to jail for mail fraud and beyond that for two years after his deportation. They finally divorced in the mid-1930s.
Simple Arbitrage
In 1919, after having set himself up in a small export-import business, Ponzi received a letter from a Spanish company requesting an advertising catalog.
Inside the envelope, he found an international reply coupon (IRC), a type of voucher accepted in various other countries in exchange for local postage stamps.
Ponzi quickly realized the moneymaking potential of taking advantage of exchange-rate differences to buy IRCs in one country and redeem them in another.
In his own flowery prose, Ponzi described that moment: “The ‘racket’ of international reply coupons actually fell in my lap like a ripe apple.
I did not have to shake the tree to get it. I just reached over, where it had fallen, and took it. It looked good. Luscious.
I examined it for flaws. Found none. I had to bite. I wouldn’t have been human if I didn’t.”
At this point, Ponzi had discovered a practice known as arbitrage—the simultaneous purchase and sale of an asset in two different markets.
Tiny differences in price allow for a modest profit. In this case, buying IRCs in Italy for one price and exchanging them for higher-priced postage stamps in the U.S. would create significant profit when done at scale.
If Ponzi had stopped there, he likely would have been free and clear.
One of the first practitioners of what later came to be called the Ponzi scheme was a woman named Sarah Howe, who started Ladies’ Deposit Co., a savings bank targeted toward unmarried women in Boston in the late 1870s.
Howe promised an interest rate of 8% per month, which she pulled off by paying early depositors with funds from new customers.
This is the very definition of a Ponzi scheme.
The Scheme
In 1920, Ponzi organized a company called Securities Exchange Co. in which he sold stock (promissory notes) advertising 50% interest after 90 days.
The funds obtained from investors were supposed to be used to buy IRCs to redeem in the U.S.
Instead, Ponzi used funds obtained from new investors to pay off old investors.
By way of explaining why he did this, Ponzi blamed the Universal Postal Union for suspending the sale of IRCs once it learned about his coupon redemption scheme.
After attempting to get around the suspension, Ponzi shifted to his “Rob Peter to pay Paul” scheme. For a while, it worked. He raked in $15 million ($220 million in 2022 dollars) in the first eight months of 1920.
He kept the scheme going by telling investors he had created an elaborate network of agents buying IRCs for him overseas that he could redeem in the U.S. for a tidy profit. In fact, there was no elaborate network of coupon buyers; he was using new investments to pay off old investors.
As of Jan. 27, 2013, the U.S. Postal Service no longer sells IRCs. International reply coupons purchased in other countries may be exchanged in the U.S. for a First-Class Mail International 1-ounce, letter-size stamp per coupon.
How It All Ended
In July 1920, the Boston Post ran a flattering front-page feature on Ponzi pegging his net worth at $8.5 million.
Less than a week later, the U.S. Post Office Department announced new conversion rates for international postal reply coupons, though officials said the rate change had nothing to do with Ponzi.
Investigations of Ponzi ensued but made little progress until the Boston Post launched its own investigation, which generated bad press, causing Ponzi to decline to accept new investments. This caused a run by current investors, and Ponzi reportedly paid out more than $1 million.
More bad press from the Post ultimately sealed Ponzi’s fate. He was eventually convicted on federal charges of mail fraud and served 3½ years in prison.
Upon parole, he was convicted of state charges, jumped bail, was caught, and went to prison again, getting out in 1934. At that time, he was deported to his native Italy, having never become a U.S. citizen.
His history in Italy and Brazil is not well documented, though it is known that he died on Jan. 18, 1949, in a charity hospital in Rio de Janeiro, leaving just $75 to pay for his burial.
How much did Charles Ponzi steal from investors?
In eight months in 1920, Ponzi raked in an estimated $15 million ($220 million today) by persuading thousands of Bostonians that he could make them rich.
What happened to Charles Ponzi after he was deported from the United States?
Accounts vary, but one of the most likely has him going to Brazil from Italy to run a fledgling airline that was ferrying supplies to Italy during World War II.
According to that account, once the United States entered the war, it and the government of Brazil shut down the airline.
Ponzi taught English and French and worked as an interpreter. He died, nearly broke, on Jan. 18, 1949, in a charity hospital in Brazil.
What are some of the largest Ponzi schemes in recent years?
Six of the best known and largest Ponzi schemes of the 20th and 21st centuries include:
2016–2018: Bitconnect’s cryptocurrency investment program scam ended with a market capitalization of $2.6 billion.
2012: Allen Stanford conducted a Ponzi scheme through his Stanford International Bank that scammed investors out of $7 billion.
2008: Tom Petters stole $3.65 billion through his firm, Petters Co. Inc.
2008: Bernie Madoff, former chairman of the Nasdaq stock exchange, scammed investors out of $65 billion, making it the biggest Ponzi scheme in history.
1994–2003: Mutual Benefits Co. conned 28,000 terminally ill people out of $1 billion in one of the most egregious Ponzi schemes of all time.
The Bottom Line
Charles Ponzi was the most flamboyant early practitioner of a scheme where the fraudster creates a plausible investment, gathers investors, then uses the money from older investors to pay off newer ones, while raking in a tidy profit.
He wasn’t the first one to think of this, but he is the person who gave his name to this practice—the same technique notoriously employed by Bernie Madoff, who stole $65 billion.
Ponzi is held responsible for stealing an estimated $15 million (worth $220 million today).